The New Economics of Offshoring

We're entering a very gray area as the electronics supply chain evolves, and that's a good thing.

For years, the conversation was bipolar: Either offshoring is good, or offshoring is bad.

But today, it's not quite so simple, and John Knight has a front-row seat to watch and exploit the changing dynamics.

Knight is a second-generation executive at a family-run Dallas manufacturing business, Knight Electronics. Last year, during the Drive for Innovation, we pulled our Chevy Volt into his parking lot and were greeted by a spare battery (a small 9V version) taped to the front door with a welcome note. You get the spirit of the company right away.

On a serious note, during an interview in his massive warehouse, Knight talked about the increasing clarity the industry is getting into supply chain costs.

There's a cost associated with doing business in Asia, and a lot of people don't figure their total supply chain costs, including warranty and quality issues, the cost of transportation, and flying back and forth to fix problems. It's hard to put your fingers on that. It's a matter of making the most of efficiency in supply chain, and that's what we're all about.

In some cases, Knight is seeing "boomerang customers" go offshore and then return for various reasons.

Tangled web
For some customers, that reason is the Internet.

"The Internet has made things interesting from the standpoint that anybody can go online and find a supplier in China," he said. "That could be a guy with a cellphone and a great website." Then the customer comes to find out the engagement wasn't as advertised.

Knight doesn't see it as us versus them or in black-and-white terms -- quite the contrary. His family has manufacturing operations in China and Taiwan (as well as Texas) and engages freely in offshoring. But in many cases, that offshoring has a big upside for his customers.

In one case he laid out in our fascinating interview (video below), a customer resisted offshoring some of its manufacturing to Knight Electronics' China facility. The customer feared it would have to lay off part of its own operation as profitability increased.

In fact, the opposite happened. Here's John Knight telling that fascinating tale and holding forth on the art, economics, and politics of offshoring.

I have heard this argument time and time again that offshoring lower margin simpler stuff can grow your own business and enable your local people to retrain to do higher margin activities. The question is what happens when the offshore suppliers can also do the higher tech more demanding stuff? Sure it is inevitable this will happen as developing countries develop.

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